hi everybody we know that income is a crucial determinants of demand in economics but just how important income elasticity of demand will give us that information we use Y for income in economics of yd is the abbreviation so the definition is in red why he measures the responsiveness of quantity demanded given a change in income and we can calculate it using this equation the percentage change in quantity demanded over the percentage change in income just remember again you Q before you P right from all my previous videos okay we don't have P here but the same concept applies Q on top Y here on the bottom and yes his percentage changes so we need to convert law numbers to percentage change if they're not already in percentage change form and this equation can do that for us the difference between two numbers divided by the original number tires by a hundred is how we get a percentage change then we can put those numbers in here and get Y D Y these very important because first thing we'll do they will tell us if we're working with normal Goods or inferior goods remember a normal good has got a positive relationship between income and demand so as income goes up demand will go up if income goes down demand will go down right whereas in fury goods have got an inverse relationship between income and demand so as income goes up demand goes down for any fury good as income goes down demand goes up for an inferior good so remember that so the first thing why he does it tells us if I work with normal or in fury Goods if the figure is positive it's a normal good how do we know that from the equation well if income goes up demand is gonna go up positive positive positive normal good if income goes down demand goes down negative negative positive number at the end is a normal good very very good will have a negative number as incomes go down negative demand for an inferior good goes up negative positive we have a negative number whereas if incomes go up quantity demand for an inferior good will go down positive negative we have a negative number in here so positive normal Goods negative in fury crews very important stuff but then when it comes to working on elasticity we can ignore the sign and just look at the number so for a normal good looking at the number it was greater than one we'll say demand is he come elastic the same language I used to put an income in this time obviously so demand is income elastic meaning if incomes go up demand for this normal good will go up proportionately more than the increase in income but we can know one stage further here for a normal good that's got a figure of greater than one we can say this good is a normal luxury that makes a lot of sense because as incomes go up we suddenly demand a heck of a lot more of it demand increases proportionately more than the rise in income we buy a lot more that tells you that income is a crucial determinants of demand here we clearly won't buy much of it before but now they are a bit richer we're buying loads of it it must be a luxury good so he can say it's a normal luxury whereas for a normal good if the figure is less than one demand is income inelastic so again incomes are going up demand for this normal good will rise yes but proportionally less than the increase in income but now we can go one stage further we can say that this good is a normal necessity and that makes sense too because we're richer but we're not buying that much more of it the man is increasing but proportionately less than the increase in income which means he must been buying it before already it's a normal necessity for an in a theory good once you've worked out there is a negative number for ye D we can ignore the sign just look at the number but there is no distinction between goods like there is for normal goods so we will just say that for an inferior good if that number ignoring the sign is greater than one demand is income last day less than one demand is income in investing and for whatever the good is actually doesn't matter it's not gonna be positive or negative if the figure is zero demand is perfectly income inelastic there is no relationship at all between income and quantity vendors so best way to understand all of that very important information is by doing some calculations take example number one average incomes in the economy are rising from twenty thousand pounds to thirty thousand pounds as a percentage change what is that while the difference between the two numbers is ten thousand pounds divided by twenty thousand pounds the original tires that's a 50% increase in income on these equations keep the sign in even a positive sign keep it in there because we know this sign at the end is very important quantity demanded of fast food meals has fallen let's say per household in a year from a hundred meals to sixty meals well clearly that's a 40% decrease if you can't see that immediately use the equation the difference is 40 divided by 100 times 500 that supportive cent decrease workout the calculation we get - no point eight as the final figure so as we do with why do we look at the sign first the sign is negative that means we're working with an inferior good yet fast food meals is an inferior good then we can ignore this sign just look at the number the number is no point 8 less than 1 so therefore you'd say demand how fast food meals is income in elastic what does that mean in this case that means that as incomes are rising quantity demanded for fast food meals is decreasing in very good but proportionately less than the increase in incomes ok so that's what demand is income it elastic means for an inferior good in this case let's look at example number 2 we can see that incomes in the economy average incomes have increased from 20,000 pounds to 25,000 pounds as a percentage change as 5,000 pounds difference divided by the original 20,000 pounds at times 500 that's a 25% increase in income we're looking at furniture now so the quantity demanded of furniture items per household again in a year let's say has increased from 12 to 21 so the difference is 9 divided by the original which is 12 times 100 that's a 75% increase in furniture items keep the signs in like I said very important do the equation clearly the number we get at the end is 3 plus 3 we need to get that in there and because we said Plus we can isolate the plus and stable furniture items clearly here are a normal good we can then ignore this sign and because the number is greater than 1 demand for furniture items is income elastic because it's a normal good we can say therefore furniture items are in normal luxury good absolutely so what does that mean in words that means here is that as incomes are rising quantity demanded for fair items is increasing but proportionately greater than the increase in incomes it's a normal luxury demand is income elastic for this good here let's go back now and look at diagrams and continue so guys how do we illustrate the concept of why the diagrammatically this is very useful for multiple-choice questions that might come up but also the essays if you want to illustrate the concept of why are you the first thing to note is that income goes on the y-axis that's very very important and that means we can have downward sloping demand curves and upward sloping demand curve don't let that put you off it's only because we are mean to normal axes if the demand curve is downward-sloping we're clearly working with inferior Goods and negative relationship routine income and demand whereas if the demand curve is upward sloping there is a positive relationship between income and demand normal Goods as income goes up demand will increase whereas for inferior Goods as income goes up demand will decrease so good stuff and then the shapes of the cars are just as we used to if we're showing inelastic demand here income animosity demand we're gonna have steep demand curves and if we're showing income elastic demand we're gonna have shallow looking Tomatoes exactly the same patterns as we used to have that makes sense just take one example let's take a normal good here so if we're saying that the man is income inelastic I even working with the normal necessity as income to go up I yes demand for this normal Google increased but proportionately less than the increase in income and I'll be clearly shown here at the same times we're used to these are the diagrams that you need and you'll be absolutely set so that covers widely perfectly that's the elasticity in the base form a completely covered stay tuned for the next video though or we look at the business relevance of all of these elasticity's and also the limitations of using them I'll see you in that video guys